[ANALYSIS] Simon Busuttil’s new gamble: Echoes of 1996?

Pollsters have always considered the self-employed sector as one of the most politically volatile segments of the Maltese electorate. While Labour has always held on to its working class grass roots despite its abandonment of traditional socialism, and the PN holds to its upper middle class base, the self-employed are key to understanding political shifts in the Maltese political landscape.

A lesson from history?

By pandering to the self-employed and the retail sector in particular, the PN is going back to its historical roots. Deeply alienated by Mintoff’s protectionism, which put restrictions on imports coupled with the introduction of national insurance (the bolla balla), the self-employed provided mass support for the PN as it struggled to win back a segment of the working class.

By 1987 the PN had assembled a coalition of the upper middle class, the self-employed and a segment of the working class to break Labour’s hold on power. Yet this coalition dramatically fell apart when Alfred Sant unexpectedly won the 1996 election on a platform of abolishing Value Added Tax. Sant successfully courted the GRTU, than led by king maker Vince Farrugia who did not shy away from supporting a general strike against the new tax alongside the GWU.

Yet this alliance hinged on Sant’s ambiguity on whether the despised cash registers (that reported their turnover to the VAT Department) would be retained or not. Some self-employed even celebrated Sant’s victory by throwing away their cash register. When in power Sant ended up retaining the cash register while growing economic uncertainty pushed the self-employed back into the PN’s bosom.

It was Eddie Fenech Adami’s turn now to court Vince Farrugia into the new pro-EU coalition, which helped the PN get re-elected in 2013. Subsequently it was the hike in electricity bills and Muscat’s promise to reduce them, which once again pushed the self-employed category away from the PN. But Muscat’s victory was not just a question of summing together different categories like hunters and the self-employed, as was the case with Sant’s ephemeral victory. It was glued by a new leadership cult; a profound desire for change and an ability to tap on both greater social liberalism and increased xenophobia with regard to migration. All this cut across class lines. This makes Busuttil’s task harder.

But 2018 is not 1996 

Moreover the 1996 election represented an insurrection of the self-employed against a fiscal mechanism (VAT), which they wanted removed – mainly the obligation to issue fiscal receipts made tax evasion more difficult.  Therefore the PL could opportunistically promise its removal, leaving everyone guessing how it would replace VAT.  

On the other hand Busuttil has presented an ambitious tax reform, which he has even costed at €85 million.  

The scheme will apply on the first €50,000 in profit made by any small business – meaning that a business that declares €50,000 will only pay €5,000 in income tax, a measure that Busuttil said will save them around €12,500 a year. 

But it will not apply to businesses that hire workers in precarious conditions, and to qualify, businesses will be obliged to introduce green measures and donate to charities or other NGOs. This in itself raises the question of why should businesses be rewarded for simply adhering to basic social obligations?

Another question is how much of an impact will such a measure really have in a sector known to understate income declarations?

Over half (56%) of 20,463 registered self-employed have declared earnings of less than €10,000 in 2009. In 2009 3% of self-employed people declared incomes over €40,000 and only 1% declared incomes over €70,000 – an indication that the majority of self-employed are exempt from income tax. In 2009 those earning more than €40,000 numbered 640. This represented little change over 2005, when only 606 self-employed workers declared incomes higher than €37,280. 

But unlike Sant in 1996 Busuttil should be credited for presenting the self-employed sector with a comprehensive reform which includes a veneer of social responsibility –making tax cuts conditional on investment in environmentally friendly measures and fiscal responsibility. Another advantage for Busuttil is that the composition of the self-employed sector is changing, attracting within its ranks more people with a tertiary education who may be keener on the fine details of policy than gut feeling, and who are more likely to be lured by incentives promoting innovation. 

Will the self-employed rally for Simon?

What is lacking for Busuttil is the anger factor. Surely the self-employed may feel let down by the government for prioritising big business interests. This was clearly the case in the Paceville masterplan, which would do away with small businesses to make way for an embellishment making the town more suited to the business elites living in the new towers.

But the self-employed are also bound to ask another question: would a PN victory risk interrupting a period of sustained economic growth? The answer to that question depends on whether small businessmen are benefitting from the multiplier effect of such growth.

This begs another question; do small businessmen view the current PN opposition as a government-in-waiting which they can trust with their vote? For winning elections is not just a matter of presenting popular policies but also a matter of being perceived as a winner. This was the case with Muscat in 2013, managing to convince voters to make a leap of faith despite lingering doubts on how sustainable his commitments in areas such as utility bills were. Busuttil still faces an uphill struggle to convince voters that he could be their next Prime Minister. If they do not believe he is, his policies will not capture their imagination.

Less tax to spend?

Another risk for the PN is that by committing itself to slash government revenue in its first budget, it risks endangering government expenditure on public services. For investment in health, welfare, universal childcare, infrastructure and public transport depends on adequate tax revenue. The lowering of income tax for middle- and high-income earners has so far been compensated by higher revenue from indirect taxation spurred by economic growth. But what will happen when the economy hits a snag?

The PN may well counter the argument by pointing out that people tend to pay more tax when taxes are not too onerous. They may even argue that by diminishing the burden on small businesses they may spur another bout of economic growth whose effects are more likely to be felt at community level.

By recognising the value of family-run small businesses as community hubs and bastions against gentrification and multi-nationals, the PN is in synch with progressive economic thinking where small businesses are increasingly seen as allies rather than adversaries of the working class.

But would not this aim be better served through a greater focus on rewarding investment in decent jobs, innovation and environmentally friendly measures through conditional cash transfers and tax refunds than through income tax cuts which are bound to further weaken the redistributive social contract on which our welfare state is based?  The answer probably is that the PN needs to win votes fast to stand a chance at the next election. But this may undermine Gonzi’s legacy of fiscal responsibility, which kept the country afloat during the global financial crisis.